A Note on Discounting an Increasingly Uncertain Future

W. Henry Chiu

Journal of Public Economic Theory, 2014, vol. 16, issue 6, 981-993

Abstract: This note clarifies the roles played by the wealth and precautionary effects in determining the socially efficient discount rate for public investment projects and how the rate should vary over time. We first give a general characterization of the effects of stochastic shifts in the consumption growth rate on the magnitude of the socially efficient discount rate. We then show that increasing uncertainty in the consumption growth rate provides a natural and compelling rationale for discounting more distant future consumption at a lower rate.

Date: 2014
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